The environmental, social and governance (ESG) movement may have caught on with the equity crowd, but it’s also spilling over into the popularity of fixed income.
According to the Financial Times, “green, social, sustainability and sustainability bond (GSSS) issuance as a percentage of total global bond issuance has risen from around 2% at the start of 2018 to a peak by more than 12% at the end of 2021, according to a study by the rating agency Moody’s.
“Prices continued to rise as this flood of debt hit the market because investor demand exploded,” the Financial Times added. “Figures from data provider EPFR show that flows to ESG and socially responsible investment bond funds grew from a net $4.2 billion in 2018 to $102 billion in 2021.”
Despite the rise, headwinds are affecting the entire bond market. Recession fears could lead to lower ESG bond issuance as companies become more hesitant to rely on bond income in an uncertain economic environment.
Nonetheless, there is still an appeal for ESG bond investors looking to tie their ideals and principles into their investment strategies. Corporate bonds can also offer more yield instead of more default risk if investors are willing to make the trade-off.
A green bond ETF to consider
Investors looking to gain ESG exposure can also add the return potential of corporate bonds. Both functions are available in the Vanguard ESG US Corporate Bond ETF (VCEB).
VCEB seeks to track the performance of the Bloomberg MSCI US Corporate SRI Select Index, which excludes bonds with a maturity of one year or less and less than $750 million outstanding and is screened for certain ESG criteria. by the index provider, which is independent of Vanguard.
- Provides debt issues filtered according to certain ESG criteria.
- Specifically excludes bonds of companies which the index sponsor determines are involved in and/or derive threshold amounts of income from certain activities or business segments related to adult entertainment, alcohol, gambling money, tobacco, nuclear weapons, controversial weapons, conventional weapons, civilian firearms, nuclear energy, genetically modified organisms or thermal coal, oil or gas.
- Excludes corporate bonds that, as determined by the index sponsor, do not meet certain standards defined by the index sponsor’s ESG Controversy Assessment Framework, as well as companies that have not at least least one woman on their board.
- Has a low expense ratio of 0.12% and a 30-day SEC yield of 4.06%, as of June 9.
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